Fri, Sep 14, 2001 page24

• World Business: Central banks infuse money into US

  COORDINATED EFFORT Financial regulators in the US, Europe and Japan are providing huge quantities of short-term capital in an effort to shore up world financial markets

  • By Richard W. Stevenson / NY NEWS SERVICE
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  Central banks around the world swung into action Wednesday in a coordinated effort to calm financial markets and reduce the chances that the attack on the US would lead to a global economic crisis.

  The Federal Reserve and its counterparts in Europe and Japan injected large amounts of money into their financial systems to reduce the possibility that panicky reactions by investors, depositors or the managers of financial institutions could lead to bank failures or some other calamity.

  "The central banks out there know what they have to do, and they did it," said Carl Weinberg, chief global economist at High Frequency Economics, a consulting firm.

  

  The sign outside the NASDAQ Marketplace extends condolences to the people of New York and Washington in New York Wednesday. The NASDAQ will remain closed for one more day in the wake of the World Trade Center attack. Full or partial equites trading will resume as early as today, and no later than Monday, according to chairman of the New York Stock Exchange Richard Grasso.

  PHOTO: REUTERS

  There were also signs that the Fed and other central banks were prepared to cut interest rates in coming days -- perhaps even before stock markets in the US reopen on Friday or Monday, but especially if Wall Street shows signs of severe distress after trading resumes.

  Although the markets in Japan as well as other Asian countries plunged, those in Europe moved higher Wednesday, providing some hope that Wall Street can avoid a big drop when equity trading resumes.

  Oil prices, after surging on Tuesday in the wake of the World Trade Center and Pentagon attacks, fell back Wednesday, with statements from producing nations that they would seek to keep prices stable by increasing output, if necessary. The dollar, which tumbled against many currencies on Tuesday, seemed to stabilize.

  Command post

  The Federal Reserve (The Fed) chairman, Alan Greenspan, made his way back to Washington on a military aircraft Wednesday from Switzerland, where he had been attending an international banking meeting. In his absence, the Fed's vice chairman, Roger Ferguson, set up a command post to monitor financial conditions in the US and to help shape the international response to the economic and financial risks.

  Treasury Secretary Paul O'Neill was flying back to the US from Japan. Deputy Secretary Kenneth W. Dam said at a news conference that with some exceptions, finance, commerce and banking in the US were all operating smoothly. "The American economy is open for business," he said.

  But behind the brave faces, economic policy-makers in this country and abroad were on high alert. Fearful that a crack in consumer or investor confidence or problems linked to the loss of people, communications and information at New York investment firms could set off cascading problems in the financial system, governments responded by making clear that financial institutions would have all the money they needed to weather any acute problem that might arise.

  Banks around the world took them up on the offer.

  The Fed reported that financial institutions made quick use on Tuesday night of the lines of overnight credit available through its discount window. Fed officials said that such borrowing was "substantially elevated above normal levels."

  Injecting money into the system

  On Wednesday morning, the Fed injected additional money into the financial system by purchasing US$38.25 billion worth of government bonds from investment houses. On a normal day, the Fed buys and sells no more than a few billion dollars worth of bonds.

  The European Central Bank took similar action, allowing banks to borrow almost unlimited amounts to shore themselves up against the possibility of a financial crisis. Commercial and other banks in Europe borrowed more than US$60 billion, indicating considerable uncertainty about the fate of the markets and the economy.

  In Japan, which had faced deepening financial problems before the attacks in New York and at the Pentagon, the stock market's sharp fall further imperiled the country's banks, whose balance sheets rely heavily on their equity holdings. The Japanese central bank responded by lending US$17 billion. Its actions were the most visible economic policy actions taken by the US and its main allies in the wake of the attack.

  The Group of Seven industrial nations issued a statement suggesting that they would work in a coordinated way to limit the economic and financial fallout. "We are committed to ensuring that this tragedy will not be compounded by disruption to the global economy," the statement said. "Our central banks have indicated that they will provide liquidity to ensure that financial markets operate in an orderly fashion."

  The statement said that the seven governments and their central banks -- from the US, Japan, Germany, Britain, France, Italy and Canada -- would "monitor economic developments and financial markets closely," and that they stood ready "to take further action as necessary."

  It suggested that the central banks, including the Fed, were considering cutting rates to ease any strains on the financial system and provide a psychological lift to investors and consumers.

  But central bankers indicated that they might wait to gauge the market reaction before deciding on the need for interest rate cuts.

  The European bank's president, Wim Duisenberg, said in an address to the European Parliament in Brussels on Wednesday that "the national central banks are standing ready to support markets and operating systems, if the need arises." But he added, "We do not and should not react to changes in short-term indicators."

  C. Fred Bergsten, director of the Institute for International Economics here, said Greenspan and the Fed would be very sensitive to any signs that problems in the stock and bond markets might feed back into the broad economy, which has been slowing for a year and seems close to lapsing into recession.

  "You've got a market shock interacting with a very fragile underlying economic situation," Bergsten said. "If the initial returns from the market look like being shaky-to-negative, I'd think there would be a case for the Fed to move."

  In the short run, regulators and policy-makers are trying to assess whether there is any danger to the normal operation of the markets from the loss of people, offices and communications.

  Keeping the US afloat

  But looking ahead, they are also watching a variety of issues that could go a long way toward determining whether the attack leads to a broad, possibly worldwide, downturn, or passes without doing severe economic damage.

  "I think the key thing will be whether this has anything more than a relatively short-run impact on confidence in the United States," Sir Eddie George, the governor of the Bank of England, said in an interview with the BBC.

  Consumers, largely, have kept the US economy afloat this year as businesses sharply cut back their investments in new computers, machinery, factories and other capital equipment.

  Economists have been counting on consumers to help preserve even slight growth until business conditions improve. The tax-rebate checks being sent out are putting US$38 billion into Americans' pocketbooks over 10 weeks. To the degree that people get nervous because of the attacks and choose to save rather than spend the money, it could deprive the economy of one of its few remaining pillars of support.

  Some of the economic aftershocks were just starting to come into focus. On Capitol Hill, members of both parties said it was increasingly likely that Congress and the Bush administration would agree to spend whatever is necessary in response to the attack, a step that would provide another fiscal stimulus to the economy.

  President Bush and Congress agreed a few hours later to spend as much as US$20 billion to respond to the attacks. The agreement will almost certainly lead both parties to set aside their agreement not to spend any of the Social Security surplus. With that agreement now moot, Congress now has more flexibility to pass another round of tax cuts to stimulate the economy.
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